CEOs paid more even as profits fall

Jamie Smith Hopkins | jamie.smith.hopkins@baltsun.com

Chief executives of public companies have long had a ready answer when criticized about high pay: It's all about company performance.

That argument has been put to the test by the toughest financial environment since the Great Depression. If performance is the standard, many of the Baltimore area's top-earning executives seem to be on shaky ground.

To see how last year's financial crisis and worsening recession affected pay, The Baltimore Sun analyzed the 20 companies in the metro area that paid their CEOs at least $1 million. Seventeen reported increases in their chief executives' compensation, even though just as many firms ended their fiscal year with lower-priced stock - substantially lower, for the most part.

Half the companies had losses or falling profits.

Foundation Coal Holdings Inc. nearly doubled CEO James F. Roberts' total compensation - to $3.8 million - in a year when the company's profits plummeted 65 percent and the stock lost three-quarters of its value. The Linthicum Heights coal producer, which was just acquired by a competitor, said in filings with the Securities and Exchange Commission that Roberts "exceeded" his performance targets, including conserving "capital and liquidity through a very tough credit market."

"Any time you see a significant decrease in share price, a significant decrease in [earnings] and an increase in pay, it's going to raise some questions. And some anger," said Charles M. Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware.

Baltimore money manager Legg Mason Inc., which lost $1.9 billion its last fiscal year, is feeling the heat. Shareholders, unhappy that Legg directors approved bonuses for executives, withheld a large number of votes for three of those directors seeking re-election.

And Constellation Energy Group Inc., parent of Baltimore Gas & Electric Co., is fending off state political leaders who want to try to cap its CEO's earnings.

Dissatisfaction with executive pay is nothing new, but it's at a fever pitch nationally thanks to the recession, the more than $1 trillion in promised government bailouts and highly publicized cases of corporate largesse. American International Group Inc. said some executives received death threats in March after it was revealed that the insurer, saved from collapse by federal intervention, was paying $165 million in bonuses.

The Obama administration appointed a "pay czar" in June to oversee compensation at companies that took the most bailout money. Last month the U.S. House of Representatives approved a bill that would give the government more power to regulate incentive pay at financial companies, plus give shareholders an advisory vote on pay.

With this environment in mind, some Baltimore-area public companies were quick to offer explanations - and alternative calculations - for their executive pay.

The Sun relied on total-compensation figures the companies reported to the SEC. But a number of companies argued that SEC rules force them to put a value on potential pay rather than what their CEOs actually got.

It's $15.7 million if you go with the SEC-required calculation - an increase of 13 percent in a year that Constellation lost $1.3 billion, almost went bankrupt and saw its stock price lose three-quarters of its value. Two state senators, outraged at that sort of pay at a company that runs a public utility, asked Maryland's attorney general in June to investigate whether the General Assembly has the power to set limits.

But Constellation, which called the request "unprecedented," said the increase was driven largely by growth in Shattuck's pension, money he won't see until he retires. He can start drawing from the $33 million pension in just over seven years, when he turns 62.

The company also noted that a large chunk of Shattuck's compensation came in the form of stock options that are worthless unless the price of the struggling stock increases significantly. Right now they're "under water" and might expire that way. His cash payment - the sure thing - was his $1.3 million salary.

Constellation also argues that if you're wondering how it reacted to its 2008 performance, you need to know Shattuck's 2009 compensation: $7.8 million, half of what he got last year.

"The company's performance was down in 2008, and our CEO's compensation reflected that, declining sharply with no annual raise, no bonus and the same applied to nearly all our senior leaders," said Rob Gould, a Constellation spokesman. "Our progressive pay-for-performance policy holds executive leadership accountable in years when performance is below expectations."

Legg Mason also rushed to explain the nearly 40 percent increase in reported compensation for Mark R. Fetting, promoted to chief executive in January 2008. In a statement, the company said his $6.6 million package - fourth-highest in the metro area - includes the expense of stock and stock options that were awarded in earlier years but vested last year. Like Shattuck's options, Fetting's are under water. Legg Mason thinks a fairer measure of its CEO's pay is $3.5 million, down 29 percent from the previous year.

Companies trying to explain away increases in total compensation often do have a point, said Alan Johnson, managing director of a New York compensation consulting firm. SEC rules about how to value stock and stock options tend to overstate income when times are bad, he said - just as they understate in good times.

Even if executives didn't take big pay cuts, they aren't immune to the pinch of the recession, he added.

"We have many CEOs that own many, many times their pay in stock in the company," said Johnson, with Johnson Associates Inc. "I had a client tell me, 'I lost four years of pay last year.' It's not time for a pity party, because that's true for a lot of average citizens, too. Look at their 401(k)s. But it is a fact."

Still, Anne Sheehan, director of corporate governance with the California State Teachers' Retirement System, isn't impressed with a lot of the pay explanations out there. The argument that pension increases shouldn't be included in the tally? "It is an expense, and the company has to book that as an expense, so it's fair to count it," she said.

The refrain she keeps hearing is that executives need incentive pay in these tough times to keep them from leaving, to which she replies: "Where are they going to go?"

"It's a 'heads I win, tails you lose' kind of thing," she said of some compensation plans. "Are there truly disincentives vs. just incentives for doing your job and then a really big incentive for doing something in addition?"

Some companies don't need complex footnotes to show they've cut pay.

T. Rowe Price, which unlike fellow money manager Legg Mason did not lose money last year, gave CEO James A.C. Kennedy $5.6 million in total compensation. That's a 28 percent drop from the year before, about the same amount that the company's net income fell. Kennedy's cash-only pay decreased even more, by 31 percent, though like Legg's CEO, he did receive incentives.

"Last year was one of the worst ever in the financial markets, and clients lost money on our watch," said Edward Giltenan, a spokesman for T. Rowe Price, which saw its stock price fall 42 percent. "And we take that very seriously. As always, we remain focused on providing good results for our clients over the long haul, and on that score, nearly 80 percent of our funds have outperformed their peer averages over the last decade."

One executive dropped off the million-plus compensation list last year because he took a pay haircut - a good bit of it voluntarily. Under Armour Inc. CEO Kevin A. Plank received no incentive pay in a year when profits fell 27 percent and the stock price dropped almost by half. But his compensation plummeted from $1.5 million to $30,002 last year because he also cut his own base salary. "As our largest stockholder, he believes he should be compensated for his services based primarily on our company's performance," Under Armour told shareholders in its proxy statement.

Some companies did well last year, despite it all. Their CEOs did well, too.

TeleCommunication Systems Inc., an Annapolis provider of wireless data services, went from a loss to a $57 million profit last year. Its stock price more than doubled, and so did chief executive Maurice B. Tosé's compensation - to $4.3 million from $1.6 million.

Columbia-based MICROS Systems Inc., which makes point-of-sale computer systems for restaurants and other businesses, also gained in stock price and profit in its fiscal year, which ended in June 2008. But CEO A.L. "Tom" Giannopoulos still hastened to explain that his 81 percent increase in compensation - which moved him to No. 3 on the pay list - isn't all it appears.

He said he didn't get any stock options in the company's 2007 fiscal year because he wanted them handed out to other employees. The options he accepted in the 2008 fiscal year added up to a large chunk of his $6.9 million compensation.